We need to change the way we measure national economic success. Instead of GDP, we should judge our economy by the pace at which ordinary household incomes rise, because the point of growth is to place prosperity into people’s hands. Against this benchmark the UK’s recent economic record is truly terrible.
Before the financial crisis, median household incomes used to grow on average by more than 2 per cent a year. This was not a temporary phenomenon linked to a fragile pre-crisis economy. It was the long-term British trend, seen ever since the Second World War. By contrast, after the financial crisis, family incomes have barely grown at all and the real incomes of working-age households are only just higher than in 2007. So we need a plan to get back to the ‘old normal’ of steady, regular income increases, which half a generation of workers have never seen. A new Fabian Society report published today examines what it will take to get family incomes to grow the way they used to.
The first step is just to believe that decent growth is possible. A sense of fatalism has overtaken Britain’s economic debate and the challenge is to show that the UK does not have to settle for the growth we have. Right now it feels like the pillars of the economic establishment are planning for stagnation. The most recent growth projections from the Bank of England and the Office for Budget Responsibility imply that median earnings will not reach their 2007 levels until well into the 2020s. As a result we’re in the extraordinary position where the economy is believed to be ‘over-heating’, with interest rate increases required, even though household incomes are barely rising.
These expectations of low growth have also led Conservative ministers to plan for yet more austerity. Further big cuts to social security are on the way that will drive up poverty and reduce the incomes of the bottom half. When your benchmark for economic success is household incomes not GDP this automatically counts as failure. While earnings are the most important component of family incomes, if social security falls in value the prosperity of low and middle income families cannot increase at the pace it used to.
Cuts to benefits and tax credits have a direct impact on household incomes. But restricting spending on public services and investment has an impact too because it suppresses growth in GDP and earnings. Boosting economy-wide demand through government spending is now essential to unlock growth in hourly earnings and productivity. Since this may in turn lead economists to re-assess whether the economy is at full capacity, interest rates should not be raised until there is clear evidence of domestically-induced inflation.
Stimulating demand is not the only way to boost Britain’s growth prospects however. There is now clear international evidence that reducing inequality will also lead to higher, more stable growth. Action on inequality is a win/win for family incomes, because it grows the size of the economic pie and the share of it that low and middle-income households receive. Politicians need to take steps to narrow the income gap across every area of public policy.
As part of this Britain needs a less flexible labour market to deliver household income growth. Twice in the last decade spikes in inflation, due to external economic shocks, rapidly translated into lower real wages because our lightly regulated labour market meant that workers could not insist on higher pay. Intervention to make modern work less precarious and to boost workplace collectivism is needed to redress power imbalances and enable workers to bargain for decent pay rises. In the past, these arguments have been made in the name of fairness, but they are vital for national prosperity too.
Continued action is also needed in areas of recent progress, namely tackling low pay and achieving full employment. The national living wage should be gradually extended to younger age-groups and more action is needed to secure high employment for mothers (who could be put off from working by the way universal credit works), disabled people and those living in areas with low employment, such as Birmingham.
In general living standards will only grow sustainably if decision makers are sensitive to place and have a plan to reduce regional inequalities. This will require the fair geographic distribution of public investment, beefed-up powers of local and regional economic leadership, the re-investment of public money within local economies, and support for stronger manufacturing supply chains.
Alongside regional economic leadership, we need strong sector-by-sector industrial strategies that are focused on increasing the pay and productivity of ordinary jobs. For low-paying sectors there should be a national strategy for good work, linked to new sector deals for industries like retail and social care. And when it comes to the sectors of the future, government should shape and steer the economy’s development, through strategic investment and leadership. For example, the Labour party has already identified two national ‘missions’ for economic policy: first, to increase R&D spending and the percentage of high-skill jobs and second to accelerate the take-up of green technologies and clean energy. This green growth is essential to meet our environmental obligations. But it will also boost household incomes by raising business productivity, opening new export markets and creating valuable mid-skill jobs.
This is an agenda for growing private sector earnings. But we must not forget that the welfare state also has a vital role to play. Strong public services and income top-ups are essential for family prosperity too. And to revive the welfare state, taxes will need to rise. If this is to happen without ordinary post-tax incomes being hit it must be the richest individuals and largest companies that pay more. Reforming taxation is therefore the final component in a progressive agenda for getting household incomes to grow, just the way they used to.